An unexpected thing is happening on the way to making the power grid more reliable — customers may wind up paying less for electricity.
Consumers and businesses may see lower bills in three years, a reversal from recent trends in which power suppliers enjoyed higher prices to provide enough juice to keep the lights on.
The operator of the nation’s largest power grid yesterday said prices dropped significantly for capacity payments to electricity generators in an annual auction in which the necessary supplies are lined up to meet projected demand over the next few years.
That amounts to welcome news for consumers, but potentially hard times for power producers, who have become accustomed to padding their earnings with higher capacity prices, especially in New Jersey.
Capacity accounts for roughly 15 percent of the cost of generating electricity on a customer bill, but that percentage has spiked in recent years, most notably last year when the grid operator, PJM Interconnection, adopted a new system for paying suppliers to make sure there is enough power when needed.
That system met with much criticism, especially from New Jersey regulators who estimated it will add $600 million to consumers’ bills in the next few years. This year’s auction ended, at least temporarily, that trend in a big way.
For New Jersey and surrounding region, the prices generators will be paid for capacity in 2019-2021 will run at $119 .77 per megawatt hour, a significant decline from the $225.42 they will get in 2018-2019. PJM secures supplies three years in advance to ensure reliable capacity.
How much bills decline for customers depends on a whole range of yet-to-be determined factors, including the expense of producing that energy, but the trend is positive in any event.
“It can’t be bad for capacity prices to go down for consumers,’’ said New Jersey Division of Rate Counsel Director Stefanie Brand. “It is certainly evidence of competition and that our fuel mix is more economical.’’
PJM initiated the new payment system last year after an unusually cold snap in two winters strained electricity supplies because some power plants shut down. To ensure greater reliability, the operator increased capacity payments to suppliers but adopted stiffer penalties for those who failed to deliver contracted power.
Changing market conditions appeared to have led to a more competitive system, officials said. “The load forecast is lower, and there was a large amount of new gas-fired combined-cycle generation clearing for the first time in the auction,’’ said Stu Bresler, senior vice president of markets for PJM.
In the auction, 5,074 megawatts of new gas-fired generation cleared — jargon for qualifying for capacity payments. Plentiful and cheap supplies of natural gas in Pennsylvania and neighboring states have crowded out generation from coal-fired units, and in some cases, nuclear plants.
The auction resulted in $6.9 billion in contracts for supplies, down from $11 billion in the previous year, according to Bresler. “The risks of these resources are being borne by investors, not consumers,’’ he said.
“It spells trouble for a large number of generators,’’ predicted Paul Patterson, an energy analyst with Glenrock Associates in New York City, who noted the prices in the auction fell lower than what power plants were receiving prior to the new system of capacity payments. “It’s going to hurt the profit margin for some generators.’’
The auction also witnessed an increase in reliance on energy efficiency, which drives down demand for electricity, and boosts in the use of solar and wind power.
To some the auction results are encouraging in that they may portend a shift in how the state and region get their electricity.
“A lot of inefficient, older coal and diesel plants cannot compete and may end up closing,’’ said Jeff Tittel, director of the New Jersey Sierra Club. “We may lose those polluting plants.’’